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OPINION: How action in Juneau creates hope and a path to solving Alaska's deficit

July 20th, 2017 | Charles Wohlforth

The passage Saturday of a bill ending cash subsidies to the oil industry creates legitimate hope for a solution to Alaska's fiscal crisis.

The change itself doesn't fill much of the gap between the state's income and spending — perhaps $75 million to $100 million of the $2.5 billion deficit, according to Revenue Commissioner Randy Hoffbeck — but it is a first sign that legislators can solve something without a gun to their heads.

Finance committee leaders are still in Juneau talking about the next step.

I realize that by giving praise I'm grading on a curve. The Legislature already wasted two years, and spent most of Alaska's budget reserves, using up options and leaving our economy in a deeper ditch than it needed to be, and deepening.

Moody's Investor Service lowered the state's credit rating again last week. During these years of indecision we've gone from having the highest rating in the U.S. to being near the lowest, with only two states below us. That's all on the Legislature.

Moody's advice was similar to what Alaskans hear on the street: Until the state has a plan, investing is risky. This manufactured uncertainty is costing jobs and kids' futures.

But at the end of last week, I expected the situation to be worse. Legislators did, too. Some had already prepared press releases casting blame for failure.

The deal that passed changes cash oil-tax credits to tax deductions against actual production. As explained by Rep. Matt Claman, D-Anchorage, this is the difference between handing out money to lure customers into your store and giving them a discount coupon to use on purchases.

During the big money years, the Legislature created credits that allowed oil companies to earn cash reimbursement, in some cases probably paying them more than their cost to drill. Some projects never produced a drop of oil.

Under the new scheme, a project that doesn't produce oil would get no state support because it would never be able to apply the deduction to taxes. The system also has time limits for using the deductions and a 4 percent minimum floor for taxes.

Ending credits for projects that don't produce oil could save 20 percent of the state's cost, Hoffbeck said. Postponing the liability also produces savings, as inflation diminishes the value of the deductions.

The House also wanted higher oil taxes, but the Senate agreed only to study Alaska's tax structure and look at changes next year.

More than the dollars saved, the hopeful part of the agreement is the evidence that legislators could reach an agreement.

From the outside, toxic relationships make no sense. The logic of conflict is self-generating, as twisted as the maze of madness. But once opponents get a peek outside that enclosed system, the path to resolution can sometimes seem obvious.

The path for the Legislature is clear. First, it needs to pass a capital budget.

The basic components of that construction plan are easy, providing matching money for highway projects funded by the federal government. But there are three main problems to solve, said Sen. Anna MacKinnon, R-Eagle River, co-chair of the Senate Finance Committee.

The House included in its version of the capital budget a full-sized Permanent Fund dividend before it agreed to cut the dividend to $1,100 in the operating budget. The higher number is still on the table.

The Senate's capital budget included a $288 million payment from the statutory budget reserve for previously earned but unpaid cash oil-tax credits. The state is only obligated to pay $75 million on that debt this year.

Gov. Bill Walker has chips in the pot, too. The Senate cut $50 million from his AKLNG gas project in its version of the capital budget.

The obvious solution is to pass a clean capital budget that simply pays for required construction. With that, move on to the big issue.

There were always four parts needed to a fiscal gap solution: oil-tax revisions, budget cuts, use of Permanent Fund earnings, and new taxes.

We have a compromise by stalemate on the first two issues. The oil-tax subsidies are gone and the budget cuts are done. The Senate avoided bigger oil taxes and the House stopped deeper budget cuts.

With final agreement on a $1,100 dividend, the hardest part of the Permanent Fund discussion will be done, too. The details of how the fund pays out money are important, but even if the Legislature does nothing, the result will be to use fund earnings. After other savings are gone, that is what's left.

The only remaining unknown piece is a source of new revenue that balances the books. The fund doesn't produce enough income to cover the deficit.

"The people of Alaska, some of them, believe we can reduce the budget by $2 billion, and we will still be fine, and we don't need an income tax or a sales tax or some broad-based tax, but I don't know how realistic that thought process is," said MacKinnon.

"We couldn't even cut $300 million this year, so how do you get to $2 billion?" she said.

When the House and Senate averted a government shutdown with compromises on spending and the dividend, the path ahead was set practically and ideologically.

Republican Sens. Mike Dunleavy and Shelley Hughes left the majority rather than vote for that budget. They were representing their just-say-no Valley constituents, but the departure dramatically weakened their point of view in the Legislature.

The majority caucus needed their votes to pass some procedural motions without the help of the Democratic minority. More importantly, the change removed their stubborn voices from majority caucus meetings, where the real decisions are made.

It remains to be seen what tax the Legislature will pass and how large. And whether it happens now or after more economic suffering.

With that last piece of the puzzle, we will know our future.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Media, which welcomes a broad range of viewpoints. To submit a piece for consideration, email letters@reportalaska.com.